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How Demonetization Makes Money For The Government

Mr. C.S. Sudheer | Updated On Wednesday, January 16,2019, 05:34 PM

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The Government scrapped 500 and 1000 rupee notes on November 8th 2016. The aim of this move was to break the back of corruption and terrorism in India, fueled by black money. The last date for you to deposit these old 500 and 1000 rupee notes at banks is December 30th 2016.

You and several of our citizens have deposited old 500 and 1000 rupee notes at banks. But will all the old 500 and 1000 rupee notes come back to the Government? No…A lot of citizens have black money. Depositing black money with the bank, does not convert it to white money. Black money becomes white, only when tax is paid on it.

Many of our citizens prefer to destroy (burn or tear) black money, rather than face a number of uncomfortable questions from the income tax officers. According to estimates by a reputed public sector bank, nearly INR 2.5 Lakh crores of old 500 and 1000 rupee notes, will not come back to the banking system. The big question on your mind? Will the Government suffer a loss if INR 2.5 Lakh crores is destroyed?

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How much black money will not come back into the banking system?

The value of 500 and 1000 rupee notes in the economy…A whopping INR 15.44 lakh crores. From November 10th 2016 to November 27th 2016, more than 8.45 lakh crores has been deposited and exchanged with banks. Now, the Government has given you a scheme to declare black money, just by paying 50% tax on it. Just click here to read more. Some more black money will come back into the economy.

Based on estimates, you can expect old 500 and 1000 rupee notes, worth around INR 13 lakh crores to come back to the banking system. What about the remaining INR 2.5 Lakh crores? This black money would not come into the banking system.

Will the Government suffer a loss if citizens destroy their hidden black money?

We know that about INR 2.5 Lakh crores in old 500 and 1000 rupee notes; will not come back into the banking system. RBI has printed these old 500 and 1000 rupee notes. RBI knows exactly how many notes it has printed. RBI will print the exact same number of the new 500 and 2000 rupee notes.

Even if you and other citizens do not deposit your old 500 and 1000 rupee notes at the bank, RBI has already printed new 500 and 2000 rupee notes, to replace these old notes. RBI will actually gain, if you and other citizens tear up or burn black money, in old 500 and 1000 rupee notes. Shocked…I’ll explain.

How does RBI gain if black money is destroyed?

If you look carefully at your rupee note, you will see a promise…A promise of the RBI…. “I promise to pay the bearer a sum of X rupees.” Yes…Rupee notes are a liability for the RBI. Shockingly….RBI is the only organization in India, for whom rupees are a liability (loss). If you destroy old 500 and 1000 rupee notes, the RBI does not have to honor these notes. RBI liabilities have come down by a whopping INR 2.5 lakh crores worth of black money which has been burnt or torn.

How does the RBI make money?

Can you have liabilities without assets? Definitely not…To make up for the loss of destroyed old 500 and 1000 rupee notes, the RBI prints new 500 and 2000 rupee notes. What does RBI do with these new rupee notes? It buys gold, Indian Government bonds and even foreign currency bonds.

RBI earns interest from these Government and foreign currency bonds. RBI can also sell bonds for a profit. RBI uses these profits to run its daily operations. Most of the income/profits RBI earns, its passes to the Government as Dividend. More than 90% of its income, RBI passes to the Government as dividend.

How Demonetization Makes Money For The Government?

The last date for you to deposit old 500 and 1000 rupee notes with banks, is December 30th 2016. What happens to the old 500 and 1000 rupee notes which are not returned? The Government will pass an ordinance (authoritative rule) to cancel these old notes. Only once these old rupee notes are cancelled, RBI can pay this money to the Government as a dividend.

What will the Government do with nearly INR 3 lakh crores it gets from RBI dividends and tax on black money? The Government will use this money to develop infrastructure in the country. It will promote tourism and transport industry in the country. Then there are welfare schemes for the poor, where the Government will spend a lot of money. Want to know more on the benefits of demonetization. Please click here.

Yes…the Government is going to be richer after demonetization. This money will help you and other citizens of our country, lead a better quality of life. What is the use of black money hidden in mattresses and walls? Let this money go to where it truly belongs.

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Mr. C.S. Sudheer

Mr. C S Sudheer is the founder and CEO of IndianMoney.com – India’s largest Financial Education Company. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.